Auto-Enrolment: Potential Expansion of Employers’ Duties
Nobody can deny that the introduction of auto-enrolment was successful in getting more people than ever to start saving for their retirement. However, auto-enrolment still has restrictions on it which stop everybody from reaping its benefits.
Auto-enrolment legislation requires employers to enrol their employees into a qualifying workplace pension scheme if they are (i) at least 22 years old but younger than state pension age; (ii) earning more than £10,000 a year and (iii) normally working in the UK. Once automatically enrolled into a pension scheme, the employer must also make minimum contributions on behalf of the employee (usually, at least 3% of “qualifying earnings”). This is a minimum, and many employers offer higher pension contributions as an incentive.
“Qualifying earnings”, though, are another barrier for inclusion. Some of the largest pension schemes in the UK which are used by employers to auto-enrol employees use “qualifying earnings” to calculate pension contributions. For the tax year 2021/2022, “qualifying earnings” means £6,240 – £50,270. In effect, somebody who is eligible for auto-enrolment and earning £11,000, will have pension contributions made by their employer based on a percentage of £4,760 rather than their full salary.
A policy paper titled “Automatic enrolment review 2017: Maintaining the momentum” was published in 2017. This paper reviewed the success of auto-enrolment and claimed that the government’s ambition was to extend automatic enrolment by lowering the age threshold and earnings limit by mid-2020s. The Pensions Minister, Guy Opperman, was asked last week about the government’s plans to implement these changes, but he responded that events had gotten in the way over the past four or five years. No clarity was given on the timing of the changes recommended in the 2017 review.
Recent research by the think tank Onward also supports extending auto-enrolment to a wider group of people. The research found that, perhaps unsurprisingly, younger people and part-time workers aren’t benefitting from auto-enrolment in the same way as other groups. The research found that those aged 16-21 years old are five times less likely to have a workplace pension than middle-aged employees. It also found that full-time employees are 1.5 times more likely to have a workplace pension than those working part-time.
The research by the think tank recommended a roadmap to achieving these changes. Making these changes to auto-enrolment will likely require new primary legislation, but as well as that, it will also require time to implement. If the proposals become a reality, employers will need to re-assess their workforce to enrol employees that were previously not enrolled because they didn’t meet requirements. On the other hand, perhaps no longer having restrictions will eventually lower the administrative burden, because every employee over 18 years old will need to be auto-enrolled into a qualifying pension scheme. It is no secret that it can be difficult to work out if certain employees earn enough to meet the earnings threshold, particularly if they have fluctuating earnings.
Meanwhile, MP Richard Holden has tabled a Private Members Bill titled “Pensions (Extension of Automatic Enrolment) Bill”. This bill aims to implement some of proposals suggested in the 2017 review and in Onwards’ research. The bill proposes to extend auto-enrolment to those aged 18 and over and remove the £10,000 earnings threshold. It is worth noting that it is not clear if the lower threshold for “qualifying earnings” (currently set at £6,240 annually) will be reduced. Perhaps this will be mentioned at a later stage as the bill progresses through parliament. In order to have maximum impact, the lower threshold for “qualifying earnings” should arguably be removed. Otherwise, somebody earning £5,000 per annum would meet the requirements to be auto-enrolled into a workplace pension scheme but wouldn’t receive any employer pension contributions.
Of course, there is another argument, that somebody earning below a certain level of income would rather receive their full salary rather than some of it being used to contribute to a pension pot. Removing the restrictions around auto-enrolment would give people a choice.
The Private Members Bill will have its second reading in the House of Commons on 25th February. There is certainly support behind it and it will be intriguing to see how it progresses through parliament. One thing is clear, the proposed changes to auto-enrolment would have an impact for many. Students who have part-time jobs at university may have a chance to start saving for their retirement. Part-time workers or workers with more than one job may also find themselves eligible for auto-enrolment whereas previously they’ve been excluded.
Everybody should be encouraged to save for their retirement and encouraging saving from a younger age can only be a good thing. When most employees had defined benefit schemes, it was far easier to make sure they were set for retirement, but with the birth of defined contribution schemes, the onus is now on the employee to save for retirement. Not much has been said about whether the minimum contribution percentages required under auto-enrolment should be increased, but if the restrictions are removed, that may be the logical next step.
Read Rhiannon’s article in HRM Guide.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.